The idea of buying American-made supplies for new pipeline projects is laudable, but the directive in President Donald Trump’s memorandum on the subject carries serious economic concerns and trade consequences, the pipeline industry and many others told the Department of Commerce recently.
Domestic sourcing requirements for steel and iron to be used for pipelines could drive up costs, delay pipeline construction, adversely affect maintenance activities and reliability of pipelines, and may have limited legal authority, a collection of pipeline groups said in April 7 comments. Current domestic capacity to produce certain grades of steel and material used for pipelines is limited, said the joint comments from the American Gas Association, American Petroleum Institute, Association of Oil Pipe Lines, Interstate Natural Gas Association of America, and GPA Midstream Association.
Other parties, such as the U.S. Chamber of Commerce, the government of Canada, foreign pipe manufacturers, and construction firms raised more issues, calling the proposal an unprecedented intrusion into private business that could result in import sanctions or foreign trade actions that would harm the U.S. economy. The 1/24/17 memorandum “will result in restrictive, punitive and complex procurement policies and those are seldom seen as the pathway to either increased competition or economic growth,” said the Associated General Contractors of America (AGC), a large commercial construction trade association.
Among the 80 or so comments filed with the Department of Commerce as of April 10, several were individual comments or others supporting the idea. The American Iron and Steel Institute (AISI) is in that group, though it’s comments were quite broad and did not delve into implications like other groups. “Public policies that will create additional demand for steel mill products – particularly those needed for the energy sector – would be very much welcomed by U.S. steel producers,” AISI said.
The Iron Ore Alliance, representing United Steelworkers and U.S. Steel, also praised the memorandum, and addressed the domestic steel industry’s ability to ramp up production and produce components needed for the pipeline sector.
Some steel and iron manufacturers provided specific details on their sales and mill production capacities.
In the short memorandum, Trump directed the Department of Commerce to submit a plan within 180 days under which all new pipelines, expansions, and repairs use materials and equipment produced in the U.S., to the maximum extent possible and to the extent permitted by law. Regarding iron and steel products, the memorandum said, “produced in the U.S.” would not mean pipeline products or material manufactured abroad from semi-finished steel or iron from the U.S., and that it would mean manufacturing from the initial melting stage through the application of coatings should occur in the U.S.
In its subsequent request for information, the Department of Commerce sought comments on various issues associated with iron and steel manufacturing processes to meet the goal of the memorandum.
Trump’s use of the full manufacturing process to include melting and address the use of semi-finished steel from abroad was applauded by the Iron Ore Alliance. “Steel is made here only if it is melted here,” the group said, adding that if given the right policy and opportunities, U.S. steel companies will rise to the challenge and make needed investments to boost production for the pipeline industry.
The pipeline groups, however, listed several concerns about the memorandum. “A number of hurdles unique to pipeline-grade steel and pipe manufacturing must be overcome to expand domestic pipeline production and manufacturing,” they said. They mentioned that one commonly used pipe material is grade X70 steel, which is not currently produced in any quantities more than 0.750-inch thickness at U.S. steel mills, and that heavier thickness steel is needed for certain pipelines.
If such hurdles are not overcome, government action to increase domestic steel and pipe production could have the unintended result of reducing or significantly delaying new pipeline projects, limiting job growth, and hurting consumers, the pipeline groups said. Fewer new pipeline projects would run counter to the Trump administration’s goal of expanding U.S. energy production and infrastructure, so “the plan to be developed by Commerce should recognize that global sourcing of steel is currently essential for the continued growth of America’s energy pipeline infrastructure and the U.S. economy overall.”
An advantage of global markets is that they allow economies to specialize in areas where they have an advantage, and the specialized steel, pipe, and equipment needed to construct pipelines requires tight controls on chemical composition, mechanical properties and quality, the pipeline groups said. Domestic steel and pipeline manufacturing firms would need time to increase their capability to meet the demand for growth in pipeline infrastructure.
The pipeline groups are concerned that a domestic sourcing requirement would undermine the industry’s ability to achieve positive economic impacts such as job growth. A requirement in line with the memorandum also could adversely affect maintenance activities on pipelines and the reliability of existing pipelines, they said.
Pipeline companies are no different from other firms that value shorter supply chains rather than longer ones, and the trade groups noted that if their members could source all materials within the U.S. at a competitive cost, policy intervention would not be needed because the market would meet their needs. Domestic sourcing requirements use a demand-side approach that is not in place for any infrastructure projects funded with private capital, they said.
“A better approach is to focus on any regulatory, tax or trade policies that currently present barriers to U.S. companies developing steel, pipe, and equipment production capacity and competing for pipeline manufacturing projects,” the groups said. That would be a supply-side approach that would put the steel and pipe equipment manufacturing sector in a better position to meet the demands of the energy and pipeline industries.
Among their suggestions, the pipeline groups said Commerce should consider the unintended consequences of domestic sourcing requirements and the impact on the U.S. economy, such as project delays, job reductions, and increased costs for energy consumers. Due to the long lead time needed for ordering material and construction, they said any requirement should only be applied prospectively, excluding pipeline projects that already have shipper commitments and have state or federal permits issued or pending.
In addition, neither Trump’s memorandum nor the agency’s request for comments provided any input on the legal authority for a domestic sourcing requirement, the groups said. They asked Commerce to allow stakeholders to provide advance comment on possible legal limitations and ramifications of any plan.
“While the Presidential Memorandum raises a number of challenges, the companies represented by the five trade associations commit to engaging with the appropriate executive branch officials, project regulators, and other vital partners, particularly steel manufacturers, to forge solutions that will promote job growth and affordable energy in America,” they said.
AGC addressed the memorandum, singling out semi-finished steel and noted that all U.S. steel mills rely on imported materials for their feedstock, with the so-called slab imports using semi-finished steel keeping the steel industry afloat during challenging economic conditions. If the goal of the proposal is to maximize jobs in the steel industry, AGC is concerned that excluding semi-finished steel would restrict the pipeline supply market and replace slab import manufacturing with a more consolidated finished steel industry that would be limited geographically and by corporate ownership.
The memorandum would result in the federal government shutting off U.S. companies from access to supply private sector pipeline projects, which would be a “dangerous slippery slope that opens the door to all sorts of federal requirements” imposing conditions on private industry, AGC said.
The group told Commerce that there are no integrated mills that melt steel west of the Mississippi River, meaning that compliance with the memorandum would increase the cost of pipeline projects in the West due to the need to transport materials from other regions.
CPW America Co., a U.S. subsidiary of large pipe manufacturer Corinth Pipeworks S.A., based in Greece, provided input on its supply chain and the parent company’s mills and manufacturing capacity. CPW said it has concentrated on sizes, grades, and products that are not available from domestic mills or in limited supply from other sources.
The company has respected fair trade policies, but is concerned that Trump’s memorandum could lead to import sanctions or trade actions that would hinder its business in the U.S.
The U.S. Chamber of Commerce praised the administration’s efforts to improve the prospects for American businesses, but said a core feature of free enterprise principles is that private firms should be free to make purchasing decisions on their own. While previous administrations have required American-made iron and steel in federally funded projects, imposing a similar mandate on the private sector would be unprecedented, the Chamber said.
Furthermore, when such requirements were imposed for federal projects, such as through the stimulus package of the American Recovery and Reinvestment Act of 2009, “the resulting experience has been higher overall construction costs, increased compliance burdens, reduced competition, and disruption of supply chains without significant American job creation,” the group said.
The government of Canada, through the Canadian Embassy, said it has serious concerns about imposing restrictions on the private sector, which would set a negative precedent, increase regulatory burdens, and run contrary to World Trade Organization and North American Free Trade Agreement obligations.
Canada and the U.S. are strong trade partners for the steel sector, with Canada being the top export destination for U.S. steel products and about 85% of all inputs used by Canadian steelmakers are purchased in the U.S., the government noted. The U.S. benefits from a healthy Canadian steel sector and any plan that would ban Canadian steel from construction for U.S. pipelines would have negative economic consequences for both countries, the Canadian government told the Commerce Department.
The European Union (EU) provided similar comments. The proposal, with a deadline for a plan to be submitted to Trump by 7/23/17, would limit the purchasing decisions of private companies, have harmful economic impact on U.S. pipeline construction, and have serious trade consequences with other countries, the EU said.
By Tom Tiernan TTiernan@fosterreport.com
This article appears as published in The Foster Report No. 3144, issued April 14, 2017
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